Get With The Plan: April 10, 2011

This is a time of transition for Mick and Althea. Mick, the family’s primary breadwinner, recently lost his job. He’s on the hunt again both in New Jersey and elsewhere, but the couple doesn’t want to put their goals of college for their kids, 10 and 8, and retirement savings to be on hold for too long.

“If we move, we need to decide whether to sell or rent our house here,” Althea says. “Even if we get what we paid for it, we’ll have to pay closing expenses, plus eat the cost of upgrades we made. Plus the house could sit on the market for months.”

They’re not sure if they should buy another house or rent if Mark gets a job that forces relocation.

The couple, whose names have been changed, have saved $112,000 in 401(k) plans, $279,000 in IRAs, $180,800 in mutual funds, $159,000 in a brokerage account, $30,000 in Certificates of Deposit, $50,000 in a money market, $115,000 in savings and $12,000 in checking. They’re also expecting severance pay of $55,000, and they’ve stashed away $104,000 in college savings.

The Star-Ledger asked Leslie Beck, a certified financial planner with Compass Wealth Management in Maplewood, to help this couple through Mick’s job transition.

“While their main stated concerns are college funding and planning for their children, as well as housing issues related to the job hunt, in order to address those concerns specifically we first need to take a step back and look at their overall financial picture,” Beck says.

Many parents choose to focus on their children’s education needs first, and it’s sometimes to the detriment of their own retirement savings. Like the instructions you get when boarding an airplane, Beck says. it’s almost always smarter to put on your own oxygen mask first when saving for multiple goals.

Mick and Althea have done an admirable job saving. Until he was laid off, Mick was contributing the maximum to his 401(k), and the couple saved an additional $30,000 in Roth IRAs and non-qualified savings.

This level of savings puts them well on their way to a successful retirement at their current expense level, Beck says. The couple owns a portfolio of individual stocks that they admit they do not monitor regularly. Unless they plan to stay on top of such a portfolio, Beck recommends they instead choose a high-quality, low-cost mutual fund or exchange-traded fund for those dollars.

With Mick as the primary provider for the family, Beck says disability insurance would make sense. Once he is employed, she says they should consider disability coverage of about $11,000 per month until retirement.

Now to college. Mick and Althea would like to send their kids to a private college, and they’ve so far they have set up 529 plans and UGMA accounts for both.

Beck says the UGMA accounts have lost some of their tax advantages, and they’ll be counted as assets of the children when it comes time for financial aid calculations. She recommends the funds be used on behalf of the children before it comes time to apply for aid.

To pay tuition, room and board at a school that today costs $50,000 a year, Beck says the couple will need to save more in the 529 plans. Assuming Mick soon gets a job at his previous salary, she suggests they contribute $26,000 to each child’s 529 plan this year and next. Using the historical return for Vanguard’s age-based 529 plan accounts, Beck believes that amount will cover the costs.

The couple has great concerns about unknowns: relocation, home sales, renting.

Beck ran two scenarios for illustrative purposes. In both, she assumed Mick would relocate for work as of Oct. 1 and earn his former $145,000 a year salary.

The first scenario assumed the couple keeps their current home until October 2013, renting it out at $4,500 per month minus an 8 percent management fee, and then selling it for $770,000. They’d also buy a new home for $770,000 in October 2011 with the same current expenses, a 20 percent down payment and a 5 percent 30-year mortgage.

The second scenario assumed they’d sell their current home in October 2011 at a slight loss for $760,000, with net proceeds of $362,869 after paying off the mortgage. They’d buy a new home for $760,000 with 20 percent down and a 5 percent 30-year mortgage. The funds left over would be invested in the children’s 529 plans and in their joint non-qualified savings account.

While the probability of success of both scenarios was similar, renting out their current home has drawbacks that don’t show in the numbers.

“They need to consider the hassle factor of having long-distance tenants, and the possibility that the wear and tear on the home could reduce the sales price, offsetting one of the reasons for holding on to it, as well as unforeseen expenses that could be incurred in the rental process,’’ she said.

And as few things in life are guaranteed, if Mick is unable to find work in the next six months, the couple needs a new review of their financial outlook.